PART D
go online
Go online to <www.pearsoned.com.au/fletcher> to find more case studies.
CASE STUDY 17
Grey markets
Chloe Savage and Richard Fletcher
I N T E R N AT I O N A L M A R K E T I N G I M P L E M E N TAT I O N
710
During the normal course of business, manufacturers of goods are able to deliver them to
consumers through predefined and negotiated
distribution channels. These usually involve
contracts and agreements which set out the rules
of distribution, such as point of sale, recommended retail price and warranty issues. Outside
these distribution channels there operate grey
markets. A ‘grey market’ refers to the flow of
goods through distribution channels other than
those authorised by the manufacturer and often
involves the goods being bought and sold at prices
lower than those that prevail in the local market.
Grey markets affect a broad range of products
including, but not limited to, recording companies, publishing houses, makers of computer
software and computer games, food and beverage
companies, automobiles, pharmaceuticals and
fashion accessories.
To the manufacturers of products so affected,
grey markets pose a significant concern. The
main advantage of grey markets to consumers is
the significant savings they receive from the
products they purchase.
KPMG LLP in the USA conducted research
into the effects of grey markets on the IT
industry. It showed that average savings when
buying products from grey markets instead of
from authorised distribution channels can be
significant. Fifty-seven percent of respondents
cited savings of between 10% and 30%, as illustrated in Figure 1.
However, this price advantage often comes
with many drawbacks that various manufacturers
try to highlight when defending orthodox distribution channels. Products available through grey
market sources are often sourced from oversupply
in another distribution channel. They are sold off
at significantly lower prices to get rid of excess
stock and are then sold to the consumers at lower
prices, often in different countries, without the
knowledge of the producer.
In the past, parallel imports for certain goods
were considered unlawful as they infringed on
copyright and trade marks, and were in common
law viewed as passing off and misleading or
deceptive conduct. Intellectual property rights’
owners and their licensees often blocked such
imports. In the past 15 years however, the government of Australia has passed legislation which
restricted the rights of the intellectual property
(IP) owners and made parallel importation a
lawful conduct (Barraclough 2006).
Provisions in both the Copyright Act 1968 and
the Trade Marks Act 1995 relating to parallel
imports adopt the principle of international
exhaustion. This theory provides that once a
trade mark or copyright owner places goods onto
the market, the owner’s ability to control subsequent dealings with the goods or services is
exhausted (Barraclough 2006).
Under section 123 of the Trade Marks Act, a
person may import goods which bear the trade
mark of another party as long as the trade mark
was applied to those goods with the Australian
registered trade mark owner’s consent, even if
this has occurred outside Australia. This provision
40
Percentage of respondents
35
30
25
20
36%
15
22%
10
21%
14%
5
7%
0
1–10%
10–20%
20–30%
Range of price advantage
30%
and above
SOURCE: KPMG LLP (2000) The Grey Market,
<www.kpmg.ca>.
has been part of the Trade Marks Act since it came
into force in 1995 (Barraclough 2006).
Some retailers that resell products on the grey
market are not able to provide the same quality of
customer support as would be the case if they had
dealt with authorised distributors. The grey
market products usually have limited or no
warranty as in most cases the warranty is only
valid in countries in which the product was
purchased through the authorised distributor and
the manufacturer will not honour warrantees on
grey market purchased goods. In these situations
the customer often has to pay the manufacturer
to perform repairs that would have been provided
free of charge had the purchase been through
authorised distribution channels.
Generally grey markets are not illegal, but
some illegal products can be masked as parallel
imports, causing consumers to purchase counterfeit goods. Another risk of grey markets is that
consumers may be buying obsolete products.
Warehouses clear stock at below market prices in
anticipation of a new product which is more technologically advanced and often cheaper. The
consumers then fall into the trap of buying what
they believe is a new product at a very discounted
price only to realise a short time later that they
711
EFFECTIVE DISTRIBUTION OVERSEAS
0%
could have purchased a far better product at a
lower price. When designing and distributing
products to different markets, producers of
consumables especially make the product based
on the tastes and requirements of the market of
the intended point of sale. Consumers are usually
not aware that they purchased the product on the
grey market and subsequently after experiencing
the problems outlined become disgruntled with
the producer of the product.
On occasion grey markets can be encouraged
by a retailer looking for a larger margin on a
product and the retailer seeks out a different
distributor, often in another country. This is
sometimes referred to as parallel importing.
Parallel importing can be defined as goods that
are imported through ‘non-official’ channels from
low-price to high-price countries (Find Law
Australia for Students 2006).
This case study will examine the grey market
dispute between Nestlé and the new supermarket
chain in Australia—Aldi. In late 2005 Aldi became
involved in a dispute with its supplier Nestlé over
what Nestlé claimed was the deliberate attempt by
Aldi to circumvent Nestlé’s established distribution channels in Australia.
Aldi sourced its Nescafé Blend 43 coffee from
its Indonesian distributor. Aldi claimed that
Nestlé prevented Aldi from access to the same
buying conditions it extended to the Woolworths
and Coles chains in Australia and to compete with
them it would have to sell the product at a loss.
Frustrated, Aldi initially turned to a Singaporean
distributor and later to a Brazilian distributor in
its efforts to bypass Nestlé Australia (Baker
McKenzie 2006).
One of the risks entailed in such action is that
since the product has been acquired from a different country, it may not be compatible with the
standards that apply in the country of final sale—
as with electrical products that are not compatible
with Australian power outlets. In Australia, this
can be a breach of sections 52 and 53 of the Trade
Practices Act 1974).
Nestlé claimed that it received large amounts
of negative formal and informal feedback and
complaints due to customers purchasing Nescafé
CHAPTER 17
FIGURE 1 Savings to consumers from grey markets
PART D
I N T E R N AT I O N A L M A R K E T I N G I M P L E M E N TAT I O N
712
Blend 43 that was manufactured to a weaker
strength to conform to Indonesian tastes. Aldi
responded by putting stickers on both the
product and the surrounding shelf areas to
inform its consumers of the origin of the product.
Nestlé argued that this action was inadequate and
refused to supply Aldi with any more products,
including other coffee products and the energy
drink Milo, until ‘Aldi improved in-store information about the parallel imported coffee’. Nestlé
also proceeded to file a claim with the Australian
Competition and Consumer Commission (ACCC)
in December 2005, outlining the reasons for its
actions.
On 9 August 2006 the ACCC revoked Nestlé’s
notice and therefore its immunity from prosecution for exclusive dealings (i.e. barred further
supply of Nestlé products to Aldi) under the Trade
Practices Act. The ACCC chairman, Graeme
Samuel, stated that:
Aldi had taken adequate steps to ensure consumers
were making informed choice.
The ACCC response further elaborated that
Nestlé’s reasoning behind the notice and its
discontinuance of the supply of its products to
Aldi:
Questions
market policies’, Managing Intellectual Property,
<www.proquest.umi.com>, accessed 22 October
2006.
Coffee Scout (2006) The Australian Coffee War, <www.
coffeescout.net>, accessed 20 October 2006.
Dibb, S., Simkin, L., Pride, W. and Ferrell, O.C. (2006)
‘Modifying the marketing mix for various markets’, in
Marketing, 4th edn, Houghton-Mifflin, Warwick, UK.
Find Law Australia for Students (2006) Nestlé vs Aldi,
<www.findlaw.com.au>, accessed 22 October 2006.
Gittins, R. (2006) ‘Why what we don’t know can hurt us’,
Sydney Morning Herald, <www.smh.com.au>,
accessed 23 October 2006.
Kayasit, P. (2006) ‘Asia’s rules on grey market goods’,
Managing Intellectual Property, <www.proquest.
umi.com>, accessed 22 October 2006.
KPMG (2006) The Grey Market, <www.kpmg.ca>,
accessed 28 September 2006.
Venu, S. (2004) ‘Should parallel imports be regulated at
all?’, The Hindu Business Line, <www.thehindu
businessline.com>, accessed 23 October 2006.
1 What are the effects of grey markets on producers and
manufacturers? Explain in relation to:
a profits; and
b brand/company image.
2 Name some specific products and companies which
relate to the grey market and parallel imports issues.
3 Outline ways in which companies may protect their
products against appearing in grey markets.
4 Draw a product distribution network map representing
this case study. It must show the distribution channels
from Nestlé to the final consumer, depicting the normal
distribution channels alongside Aldi’s grey market
distribution channel.
Bibliography
Baker McKenzie (2006) Nestlé Australia Ltd—Exclusive
Dealing Notification N31488, <www.accc.gov.au>,
accessed 23 October 2006.
Barraclough, E. (2006) ‘Companies rapped over grey
• substantially lessened competition in the
instant coffee market;
• discouraged and eliminated a new source of
competition for the local (Australian) Nescafé
instant coffee brands; and
• removed the stimulus to other Australian
grocery retailers, who might have responded
to Aldi’s sale of the imported Nescafé instant
coffee by discounting Nescafé Blend 43 or
importing similar products.
The ACCC’s judgement showed that it viewed
the refusal to supply Aldi as going much further
than was needed to inform consumers.